Mr. Bernstein Module 59: Graphing Perfect Competition October 2017 AP Economics Mr. Bernstein Module 59: Graphing Perfect Competition October 2017

AP Economics Mr. Bernstein Is this Perfectly Competitive firm making a profit?

AP Economics Mr. Bernstein Is this Perfectly Competitive firm making a profit? Profit Maximizing Output = 5 Profit Per Unit = 8-6 = 2 Total Profit = 5 * 2 = 10

AP Economics Mr. Bernstein Is this Perfectly Competitive firm making a profit? The Profit can be viewed as a rectangle with size Q * (P – AC)

AP Economics Mr. Bernstein Is this Perfectly Competitive firm making a profit? NO!! ATC > P ATC P Q* MC P=MR=d=AR $ Output

AP Economics Mr. Bernstein Is this Perfectly Competitive firm making a profit? P = ATC Economic Profit = 0 AKA Normal Profit Breakeven Point Only occurs at the minimum of the ATC curve… ATC Q* MC P=MR=d=AR $ Output

AP Economics Mr. Bernstein The Short-Run Production Decision Why continue to produce if P = MR = MC? Because loss from producing at P = MC may be less than loss of producing 0! The Shut-down Rule: Shut down if TR < TVC Shut down if P < AVC

AP Economics Mr. Bernstein The Short-Run Production Decision Shut down when P < AVC (MC is supply curve) ATC P=ATC Q* MC P=MR=d=AR $ Output AVC Shut-down Price

AP Economics Mr. Bernstein The Long Run Production Decision In the long run, firms unable to earn a profit would not only shut down short term, they would exit the industry Remember in Perfect Competition there are no barriers to entry or exit